Generational Transfer More Than a Financial Matter

Generational Transfer More Than a Financial Matter

I’ve been observing my farm clients for several months in preparation for writing an article about how to successfully transfer the management, or more accurately stated, the decision making from one generation to the next. After many years of working with family owned farm businesses I thought I would be able to sit down and crank out an article in a few minutes. Not the case. Anything to do with how humans think and react to situations is just a little, to say the least, complex.

Any observations I share here will most certainly be laden with exceptions. It is that very realization that makes this such a difficult challenge for all smaller businesses. I have a friend whose father started a hardware business some 50 years ago and is now studying how to transition the business to a third generation. The family has devoted their lives to this business and now wants to begin the process of stepping back from the day-to-day management of the business. Several factors come into play when considering the transfer of the business to the siblings or to a younger unrelated party. These include the strength of the business’s balance sheet, the ability of the business to make money (cash flow), and possibly the most important aspect in successful business succession – the transfer of the management of the business.

No one would disagree that open and honest communication is a major factor necessary to any successful business. You would think with all the high tech communications devices we now have; communications would no longer be an issue. But quite the opposite seems to be true. Most businesses have a rule of thumb that service people are to field customer inquiries before the end of each business day. Now we have cell phones, texting and even the old fashion email method of communications, so one would think communicating with one-another would be virtually instantaneous and complete. I would venture to say when a family member or an employee doesn’t communicate in a timely fashion or heaven forbid, not at all, they don’t want you to know what they are doing and they most likely have little respect for you and your judgment. Relinquishing authority and delegating responsibility is not likely to occur in an environment where respect and trust do not exist. Meaningful communications is the key that supersedes all other functions.

I interviewed a family operated grain and dairy operation in eastern Wisconsin in preparation for writing this article. I have had the privilege to be an understudy for this business for 20 years. This family started with a couple hundred acres and no dairy cows. They now have a several hundred cow dairy operation and 2000 acres in just their third generation. They now exceed 10 million dollars in annual sales.

The process this operation has used to train and transfer the management of the operation from one generation to the next is certainly not the only way to accomplish this challenging task but some components may be of value to other farm families. As this producer and his wife near 60 years of age, they have realized they are leading their business the same way his father before him did. We see all too frequently the negative side of this altruism when kids are raised in a dysfunctional home they will likely raise their own families in a similar negative method. So why would we not observe the same phenomenon in a positive light? Siblings raised in a hard-working “can do” and, fiscally conservative home, will most likely managed a family business in a similar way to how their parents ran the business.

That’s not to say there won’t be some differences in the personalities and philosophies of the kids as compared to their parents and to the other siblings. Understanding, accepting and embracing these differences makes all the difference in the successful transfer of the management of the business.

Another observation that is clearly evident is a family’s ability to work as a unit or team. Do they have a history of working together with minimal bickering in times of stress? Have they pulled together in crisis situations when a team member is ill or has to be away or when the weather has slowed planting progress?

Have family team members been able to delegate responsibilities? It is natural for individual team members to have varied skills and abilities. Some individuals may have a natural ability for mechanics or an ability to recognize when a cow is off-feed. Other team members may have an affinity for book keeping, business planning or carrying out the human resource functions of the business. The senior member of the organization must recognize these important individual attributes and encourage the younger partners to take on that piece of the pie and run with it.

Often times the management of a small business primarily rests in the hands of one individual at a time. Many of our agricultural businesses have been sole proprietorships in which one individual has made all the important decisions. In larger farming operations, where two or more brothers have farmed together for a long time, the passing of the torch from one generation to another will occur more smoothly as compared to farms that have not had individual family members specialize in their roles.

Frequently the older generation will feel threatened by the younger generation’s enthusiasm and be leery about their lack of experience. It is very difficult for the older, more experienced generation to step back and let the younger generation make decisions that may be in part mistakes. Senior managers must recognize even though they possess years of experience that seasoning may be a two edged sword. Determining when the school of hard knocks is of value and when experience is obsolete thinking is hard to recognize, let alone accept the obsolescence.

The producer and his wife I interviewed for this article took an innovative approach to minimizing the risk to their business as they brought the less experienced, younger generation into their business. Their approach was to encourage their children to take personal risk. They did this in two ways, one was to sell a portion of their business to individual off-spring and or to inspire each son and daughter to buy and rent land on their own. Any error in judgment or resultant bad luck belonged to them. Kind of like the cost of a college education – paying to learn. This approach also allows the off-spring to determine how they will react to the pressures of being in business for themselves. Handling the pressures of farming is not for everyone. Can they handle the stress of the unknown?

This approach may not be suitable for everyone. Some kids aren’t that self-reliant and confident and need a more controlled approach. Some folks will need more time to mature before they are capable of venturing out on their own. Parents need to know their kids’ personalities and how they react under pressure.

When they make poor decision, and be assured they will, learn when you can offer assistance and when to, plainly speaking, “keep your mouth shut.” This may be the most important point in this article!!

As the senior manager delegates responsibility; how can he or she know that the business is firing on all cylinders? First of all, before bringing an off-spring into the business following high school and even college, hire them first as an employee. Lay out clear, explicit and realistic expectations. Hire them just as you would any other employee without any special treatment. Remember you are constantly modeling your management style to the younger generation. Training is constant and on-going, even when it is done informal. Went they are in charge, they will look back at how you groomed them for their role and like do it the same way you did.

Determine how you intend to develop the next generation of farm managers. Once their individual talents have been determined, foster that development. Encourage them to attend motivating continuing education seminars and classes. Help them learn how to network with others and seek out important mentors for their personal and professional development. Then gradually, for example, suggest they work with the seed sales person to select the varieties they will use on their own rented or owned land. Over time delegate more and more of the decision making to the next generation. If they want you to continue assisting in decision making, that is a bonus, but encourage them to take ownership of the management.

Senior management can and should monitor performance by keeping a watchful eye on leading performance indicators. For a dairy, this might include agreeing on a set of critical success factors. Items like pregnancy rate, days open, per cow per day milk production and many other indicators. Go for a ride in the truck to evaluate corn stands, fertility plans, residue cover and measure yield performance. Ask leading questions about what needs improvement. Suggest your young manager develop a written plan when evaluating new practices.

There should be some immediacy to the management transfer rather than too slow a process. There are a couple reasons for a rapid transition. One reason is when a segment or enterprise of the business has been delegated to a younger more energetic manager, they likely aren’t aware of self-imposed or perceived limitations. This is a good thing. Let their enthusiasm be a self-motivator. Under no circumstances dowse their enthusiasm, but rather encourage them to try new things on a controlled basis.

I’ve been very slow, myself, in accepting the realities of human nature. Accepting the fact that you rarely can change or control the actions of others is a lesson many of us should have learned much earlier in life. After all, it’s hard enough to manage ourselves let along control the actions of others. Learning to accept this realization is no doubt at the heart of this matter. At times senior management must step aside. It is better to purposely make this management transition in a controlled way rather than have a sudden death or debilitating illness happen to the key person.

I remember the story told in our family when my grandfather suddenly and unexpectedly died. My uncle who still milks cows was only 19 years old at the time. He found himself suddenly harnessed with the work and management of the dairy farm which still had two young siblings at home and a bereaved mother to support. As the story goes, that first spring my uncle planted the corn without plates in the planter. Needless to say this could have been a disaster if it had not been for a wetter than normal summer.

Today the transfer of the management and decision making from one generation to the next is a much more serious matter than it was for my uncle in 1961. The younger generation should heed the words in Exodus 20:12 by "Honoring your father and your mother, so that you may live long in the land the LORD your God is giving you”, and parents should heed Colossians 3:21, “Fathers, do not embitter your children, or they will become discouraged.” The most powerful management occurs when tried and true methods are merged with new technology.

Successful management transition requires not just good communication but honest and straight forward communications undergirded by mutual respect for one another. Out of good communications and respect emerges trust. Don’t be so naive to believe this transfer process is going to be anything close to a panacea. Respect and trust will be the anchor that holds the operation together in challenging times.

These topics of discussion will be the focus of the Lakeshore Technical Colleges Farm Business Program this fall and the will be further explored at the Progressive Operator’s sessions to be held this winter entitled, “Would You Work for You?”.

Feel free to contact Greg Booher (greg.booher@gotoltc.edu) to discuss management transition over a cup of endless coffee and learn more about how to get involved in the Farm Business program at Lakeshore Technical College.